Higher Price of Gas Negates Cuts on Social Security Taxes

by Don Azarias
May 16, 2011
According to the Associated Press (AP), Americans are earning and spending more, but whatever extra money they are netting is being used to fill their gas tanks. Gas prices have drained more than half the extra cash Americans are getting this year from a cut in Social Security taxes. For the readers’ information, higher price of gas doesn’t help the U.S. economy. I will elaborate on this on the latter part of this article.  
 
The Social Security tax cut will give most households an additional $1,000 to $2,000 this year. When President Barack Obama signed it into law in December, economists predicted higher take-home pay that would lead to more spending and stronger economic growth.
 
Still, much of the anticipated benefit from the tax cut will be lost as half to two-thirds of the extra cash will ultimately go toward higher gas prices. The government report also showed that food prices and other basic commodities have risen in recent months. 
 
The latest national average for a gallon of regular gas was pegged at $3.91. That’s about 37 cents higher than a month ago and almost a dollar higher than a year ago. The price has already hit the $4.00 per gallon mark in more than a half a dozen states with Illinois being one of them. It also holds the unwelcome honor of having the highest price per gallon in the nation with a $5.00 per gallon price on premium brand in Chicago.  
 
Like I said earlier, higher gas prices generally don’t help the economy, even though they force people to spend more. The additional money doesn’t go toward making more products in the United States. It generally ends up going overseas to oil-producing nations. With most of the money going overseas, and higher prices leave people with less money to buy automobiles, appliances, computers, clothes and other goods and services that help stimulate the economy.
 
Most people don’t have the luxury of deciding to buy less fuel. They have to get to work. So they spend more on gas, and less on other goods and services that do more to drive U.S. economic growth. Again, we have to be reminded that consumer spending accounts for 70 percent of growth.
 
Moreover, the slowdown in economic recovery is being exacerbated by the sustained rise in gas prices, depressed real estate market and deep cuts in the federal government spending. Those spending cuts will also impact state and municipal governments. Consequently, all of that could drag on the U.S. economy through the rest of the year. Another adverse factor is that the United States has an unfavorable balance of trade that results in trade deficit because the value of its imports exceeds that of its exports.
 
According to the Commerce Department, consumer spending jumped 0.7 percent last month, and personal incomes rose 0.3 percent. Both gains reflected the cut of two percentage points in the Social Security tax, raising take-home pay. They also illustrated how higher gas prices are stressing household budgets. After adjusting for inflation, spending rose just 0.3 percent. After-tax incomes actually fell 0.1 percent.
  
Since gas and other fuel products are “consumer necessity”, rise in prices normally affects consumer confidence. People tend to hold on to their cash instead of spending freely on automobiles, furniture, appliances, clothes and other goods and services. Ultimately, less spending can hurt job growth because businesses will feel less confident. As a result, they will defer hirings and cut productions or stop stocking their shelves. Economists are saying that rise in gasoline prices for an entire year, could cost the economy close to 300,000 jobs.
 
According to the government report, consumers made big purchases in February. Spending on durable goods rose 1.7 percent, much of it from new cars. And though the housing market had its worst year in a decade last year, the National Association of Realtors says more people signed contracts to buy homes in February than in January. Still, economists are lowering expectations for the January-to-March quarter. Most economists are predicting that consumer spending will likely grow only 2 percent to 2.5 percent in that stretch. That would be down sharply from the 4 percent increase in consumer spending in the October-December period, the fastest pace in four years.
 
The big rise in spending and smaller increase in incomes pushed the household savings rate down to 5.8 percent of after-tax incomes last month. That compared with 6.1 percent in January.
 
Some economists are not expecting food and energy prices to keep rising sharply and are expecting that rise in commodity prices to be short-lived. But again, let’s all bear in mind that that’s just an educated guess. Those so-called economic experts and gurus have low batting averages when it comes to hitting the intended target. However, let’s just hope that they are right, for a change.